Will GST become a Reality in India ? Implications

July 21, 2016

The Goods and Services Tax (GST) aims to simplify and unify India’s current indirect tax regime (by removing the complexity of multiple state/central taxes and a multitude of exemptions, and ensuring a seamless flow of input tax credit in the value chain), thus we believe that its implementation will be a game-changer for India. Apart from simplifying the indirect tax structure, the GST should help to create “One” India by eliminating geographical fragmentation. While the government has been trying to implement a GST for the past five-six years, it has never been so close. The constitutional amendment has already been passed in the Lower House, and a model GST law has been released. While the GST is facing hurdles in the Upper House (where the ruling NDA government is in minority), the political consensus seems to be changing in favour of the GST.

From the bill’s passage to GST implementation requires many steps and non-trivial decisions – among the most complex being the mapping of the GST rates (zero, low, standard and demerit) to the hundreds of categories that incur excise and sales tax currently. These rate schedules also embody accumulated institutional knowledge, e.g. which part of complex value chains need incentives either in the form of zero-rating or exemption. This will also require synchronization of VAT rates across states, and may even drive some iteration in the fixing of the Revenue neutral Rate.

Stock market implications of the GST bill’s passage can be at two levels: the first at a macro level as it’s become the bell-weather of “radical” reform, and should improve comfort among global investors; the second at the stock level.